GLOBAL - DB pension buy-outs are an extreme solution, and companies should address each of their risks individually as some could be beneficial to keep, said Anthony Ashton, an investment consultant with Hewitt.
Companies selling their pension scheme transfer all risk - including longevity, interest rate, and equity risk - to the insurance company, but Ashton added: "We advise clients to consider each of these risks separately, then decide which risks they feel they can get a positive result from and then offload the rest. Some of the new DB buy-out players will consider a partial buy-out, sharing some risks and transferring others."
The pension buy-out market, particularly in the UK, has seen many new entrants in recent times, although there has yet to be any significant activity from firms looking to offload their pension liabilities.
Ashton said new accounting changes, which will require companies to show their pension liabilities on their balance sheets, could push some companies down that route, and added that only a small percentage needed to do so for it to be a large market.
"When one of these companies buys a pension scheme they charge a premium, which makes it expensive, but it could be a high volume business, when you consider that there are £1trn of DB pension liabilities in the UK alone," said Ashton.
So it would only take a small percentage of companies to go down that route and it would be a large market. But whether it is a lucrative market is a moot point."
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